I. Yesterday’s News
International News

1. China has underestimated U.S. President Donald Trump's resolve to impose more tariffs unless it changes its "predatory" trade practices, a White House trade adviser said on Tuesday, as Trump greatly expanded the amount of Chinese imports possibly facing new duties. The growing trade conflict hit financial markets hard, with Beijing accusing the United States of "extreme pressure and blackmailing" and vowing to retaliate. With both sides upping the ante, the risks of a damaging trade war grew dramatically. White House trade adviser Peter Navarro said Beijing had more to lose from a trade war. China imported $129.89 billion of U.S. goods last year, while the United States purchased $505.47 billion of Chinese products, according to U.S. Data. China's commerce ministry said Beijing will fight back with "qualitative" and "quantitative" measures if the United States publishes an additional list of tariffs on Chinese goods.

2. U.S. senators who back a clampdown on ZTE Corp urged fellow lawmakers on Tuesday not to give in to White House pressure to support an agreement lifting a ban on the Chinese telecommunications company. That agreement, announced on June 7, has not yet been enacted. A Commerce Department official told Reuters on Tuesday that ZTE and the U.S. government were still working on an escrow arrangement before the ban on the company can be lifted.

3. U.S. homebuilding surged to near an 11-year high in May amid an acceleration in both single-family and multi-family home construction, but a second straight monthly drop in permits suggested housing market activity would remain moderate. Housing starts vaulted 5.0 percent to a seasonally adjusted annual rate of 1.350 million units last month, the Commerce Department said. That was the highest level since July 2007. Building permits fell 4.6 percent to a rate of 1.301 million units, the lowest level since September 2017. Economists polled by Reuters had forecast housing starts rising to a pace of 1.310 million units last month and permits declining to a rate of 1.350 million units.

4. Iran said on Tuesday OPEC was unlikely to reach a deal on oil output this week, setting the stage for a clash with Saudi Arabia and Russia, which are pushing to raise production steeply from July to meet growing global demand. The Organization of the Petroleum Exporting Countries meets on Friday to set output policy amid calls from U.S. President Donald Trump and China to cool down oil prices and support the global economy by producing more crude. OPEC's de facto leader, Saudi Arabia, and non-member Russia have proposed gradually relaxing production cuts, while OPEC members Iran, Iraq, Venezuela and Algeria have opposed such a move. "I don’t believe at this meeting we can reach agreement. OPEC is not the organisation to receive instruction from President Trump ... OPEC is not part of the Department of Energy of the United States," Iran's oil minister Bijan Zanganeh told reporters after arriving in Vienna, where OPEC is headquartered.

5. The European Central Bank will be patient in tightening policy further, ECB President Mario Draghi said on Tuesday, adding that market pricings for its first post-crisis rate hike were consistent with its aim to move gradually. "We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter," Draghi told the ECB's hallmark policy forum in Sintra, Portugal. "The path of very short-term interest rates broadly reflects these principles."

6. Australia's central bank is sounding more upbeat about a pick-up in economic activity, but high household debt and slow wage growth mean interest rates are set to stay at all-time lows for some while yet, minutes of its June policy meeting showed on Tuesday. The Reserve Bank of Australia (RBA) expects growth in the country's economy to crest above 3 percent this year, helped by strong exports and public spending. However, policy makers saw a downside risk to the global economic outlook from trade tensions between the United States and China, as well as broader tariff disputes. Only last week, Governor Philip Lowe said any increase in cash rates was still "some time away" as wage growth and prices remain tepid.

7. North Korean leader Kim Jong-un has arrived for a two-day visit in China, where he is expected to discuss with Chinese leaders his next steps after his summit with US President Donald Trump. Kim's visit beginning on Tuesday is the third trip he made to China in three months, and comes exactly a week after his landmark meeting with the US leader in Singapore on June 12. Trump agreed to work with Kim towards complete denuclearisation of the Korean Peninsula, committed to provide the North's regime with security guarantees and pledged to end "war games", which Pyongyang and Beijing have long seen as provocative. On Tuesday South Korea and the Pentagon announced they would halt the annual Freedom Guardian military drill scheduled for August.

Domestic News

8. U.S. President Donald Trump threatened on Monday to impose a 10 percent tariff on $200 billion of Chinese goods, prompting a swift warning from Beijing of retaliation, as the trade conflict between the world's two biggest economies quickly escalated. In a statement, Trump said he had asked U.S. Trade Representative Robert Lighthizer to identify the Chinese products to be subject to the new tariffs. He said the move was in retaliation for China's decision to raise tariffs on $50 billion in U.S. goods.

9. China's top legislature Tuesday began reviewing a draft amendment to the Individual Income Tax Law. The draft amendment, submitted for the first reading at a bimonthly session of the National People's Congress (NPC) Standing Committee, raises the minimum threshold for personal income tax to 60,000 yuan per year, and adds special expense deductions for items like children's education, continuing education, treatment for serious diseases, as well as housing loan interest and rent.

10 China's central bank on Tuesday lent 200 billion yuan ($31 billion) to financial institutions via its medium-term lending facility (MLF). The People's Bank of China pumped 100 billion yuan into the market through reverse repos, leading to a net injection of 250 billion yuan. This move highlighted concerns over potential economic drag from a trade war with the United States, and was probably "part of the package" of measures to counteract the potential fallout from the trade conflict.

II. Market Overview
FX
1. Global Market

The dollar and yen rose on Tuesday as traders piled into perceived less risky currencies after U.S. President Donald Trump threatened to slap more tariffs on China, fanning a trade dispute between the world's two biggest economies. The dollar index reached 95.296, the highest since last July. It was last up 0.20 percent at 95.987. The yen climbed 0.5 percent at 109.97 yen per dollar, while it advanced 0.8 percent versus the euro to 127.43 yen after hitting its strongest level in over two weeks. Among the day's losers, the yuan weakened to 6.4948 to the dollar in the offshore market, the lowest in five months, before easing to 6.4800 in late U.S. Trading. The Australian dollar sagged to a one-year low of $0.73475 as the trade tension hurt base metal prices. The Canadian dollar fell to a one-year low of C$1.3291 on worries about Canada's own trade feud with the United States.

2. Home Market

China's yuan skidded by over 500 bps to a more than 5-month low against the U.S. dollar on Tuesday, as sentiment soured in the wake of escalating trade tensions between the world's two largest economies. The CFETS index breaching above the key mark of 98 to hit a 27-month high was also a reason to short yuan, analysts said. Lack of elasticity and a firmer dollar index also pushed up the CEFTS index, which, in turn, will worsen China’s trade environment, foreign trade in particular. Improving yuan’s elasticity could be the best way to deal with the situations as market expectations diverge.

Precious Metals

Gold fell to a near six-month low and platinum hit its lowest since February 2016 on Wednesday as a stronger greenback was overwhelmed by safe-haven buying, spurred by fears of a trade war between the world's two top economies. Spot gold fell to $1,274.37 per ounce, having touched its lowest since Dec. 22 at $1,270. U.S. gold futures for August delivery settled down $1.50, or 0.1 percent, at $1,278.60 per ounce. Platinum closed at $867.5 an ounce, earlier touching its lowest since February 3, 2016 at $856.85.

Commodities
Crude Oil

Oil fell on Tuesday ahead of a possible increase in OPEC crude supply, and as an escalating trade dispute between the United States and China unleashed sharp selloffs in many global markets. Brent crude futures slipped 26 cents to settle at $75.08 a barrel, while U.S. West Texas Intermediate crude futures fell 78 cents, or 1.2 percent, to settle at $65.07 a barrel.

U.S. Treasuries
1. U.S. Bonds

U.S. Treasury yields retreated on Tuesday as trade tensions between China and the United States intensified after President Donald Trump threatened to impose a 10 percent tariff on $200 billion of Chinese goods while Beijing warned it would fight back. U.S. 10-year and 30-year yields fell to three-week lows, while those on two-year notes slid to two-week troughs. U.S. benchmark 10-year yields fell to a three-week low of 2.853 percent. U.S. 30-year yields dropped to 2.991 percent, a three-week low as well, and last traded at 3.028 percent. U.S. two-year yields sank to a two-week low of 2.496 percent, and last traded at 2.549 percent.

2. Chinese bonds

The growth of China’s 10-year Treasury bond futures picked up in the afternoon session, up 0.5 percent during the session and sending yields of major interest rates debts down 3-4 bps. Safe-haven sentiment out of escalated U.S.-China trade conflict and unexpected MLF and reverse repo by PBOC added to the slump in stock market in igniting expectations on continuing easing. Institutional investors were also inspired to build positions, fueling buying bets.

Stock Market
1. U.S. Equities

U.S. stocks fell on Tuesday as a sharp escalation in the trade dispute between the United States and China rattled markets and put the Dow Jones Industrial Average back in negative territory for the year. President Donald Trump threatened to impose a 10 percent tariff on another $200 billion of Chinese goods, and Beijing warned it would retaliate. The Dow Jones Industrial Average fell 287.26 points, or 1.15 percent, to 24,700.21, the S&P 500 lost 11.18 points, or 0.40 percent, to 2,762.57 and the Nasdaq Composite dropped 21.44 points, or 0.28 percent, to 7,725.59.

2.Hong Kong Equities

Hong Kong stocks closed at their lowest in more than four months, tracking other Asian markets roiled by escalating China-U.S. trade frictions. The Hang Seng index closed down 841.34 points or 2.78 percent at 29,468.15, its lowest since early February, while the China Enterprises Index lost 3.18 percent to 11,492.77, its lowest in six months.

3. China Equities

Shanghai stocks tumbled 3.8 percent on Tuesday to a two-year low, as escalating China-U.S. trade frictions and tightening liquidity unleashed panic sentiment. Individual stocks plunged across the board after Washington's fresh tariff threats against China raised the spectre of a full-blown trade war. Correction is expected in the near term, but the strength will be limited. The Shanghai Composite Index finished the session down 114.08 points or 3.78 percent at 2,907.82 points, not far from previous low at 2,854.29 hit on June 24 2016. The turnover of Shanghai A shares surged almost 50 percent to 240.9 billion yuan from previous session’s 161.9 billion yuan. The blue chip CSI300 index fell 3.53 percent to 3,621.12.